How to Evaluate a Startup

Often managers are responsible for grappling with complex problems in their enterprises -- new problems with many diverse elements interacting in a dynamic way (for an interesting model of these sorts of complex problems, check out this diagram). Recently many startup companies have sprouted up promising to help solve such problems. Their pitches may sound tempting, but how can you evaluate a startup vendor before you sign them up to work on your problem? Will they be around in one year or five?

Startups have yet to build a sustainable revenue stream, which means customers are essentially placing bets on the company's future existence. To make sure you aren't making a sucker bet, look closely at the funding structure. Who has invested in the company, and what is the exit strategy? Do the investors have a record of long-term growth, or are they looking for a quick return via acquisition? If it's the latter, investors may push the startup to change its strategy or business model midstream to capitalize on "hot" trends.

A startup's pedigree also should be taken into account when assessing risks. How experienced is the founder and the executive team? Who is sitting on the board?

As you would when considering an established vendor, conduct technical due diligence. Just because a product has launched doesn't mean it's ready for a production environment. Also be prepared for bumps in implementation and support.

Conry-Murray also points out that purchasing from startups offers benefits as well as risks. "Companies look to startups because they promise to solve problems faster, better, or cheaper (sometimes all three!).... early customers have considerable influence on product development; they can use that leverage to get their needs met and help direct the evolution of the product. First-comers also may get preferential treatment."

If your organization is faced with a complex problem, a startup may be your best bet for a true partner in creating an innovative solution tailor fit to your company. Just make sure you've researched them thoroughly before getting too deeply involved with their product.